Minneapolis-based U.S. Bank last week began offering a small-dollar loan product called Simple Loan that charges interest rates ranging from more than 70 percent to almost 88 percent.
With Simple Loan, U.S. Bank checking account customers who have been with the bank for at least six months and have at least three months of direct deposits can borrow between $100 and $1,000 with no hidden fees. U.S. Bank customers pay back the loan over three months with an automatic debit from their checking account at a rate of $12 per $100 borrowed.
So for a $100 loan, the customer pays $37.33 a month for three months for an annual interest rate of 70.6 percent. For a $1,000 loan, the customer pays $373.33 per month for three months for an annual interest rate of 70.7 percent.
The U.S. Bank customer who doesn't want to have an automatic draft will be charged $15 per $100 borrowed to pay manually. A $1,000 loan repaid with a fee of $15 per $100 works out to an annual interest rate of almost 88 percent.
U.S. Bank is offering the loan nationwide, including at its 39 branches in Arkansas despite the fact that Arkansas put a cap on interest rates of 17 percent in 2010. But the state usury law doesn't apply to national banks.
"I find [U.S. Bank's] loan offering very disturbing," said Hank Klein, who led the effort to shut down payday lending stores in Arkansas, which regularly charged 300 percent and more in interest rates.
According to a Federal Reserve study in May, about 40 percent of U.S. adults said they would not be able to cover a $400 unexpected expense or would cover it by selling something or borrowing money.
"I find it interesting that they mention that 40 percent of Americans would not be able to repay a $400 unexpected expense," said Klein, former chief executive officer at Arkansas Federal Credit Union. "Just how are they going to repay the payments on a U.S. Bank $400 Simple Loan?"
U.S. Bank believes there is clearly a need for a loan product like the Simple Loan, said Molly Snyder, a spokesman for the bank.
"It was really a two-year process to bring [the Simple Loan] to life to help position our customers for success when they need it most," Snyder said. "It's designed to help our existing customer satisfy a need."
Other groups are warning potential users of the Simple Loan of its high interest rate.
The Center for Responsible Lending, a North Carolina nonprofit research organization that tracks what it considers predatory lending practices throughout the country, said the Simple Loan isn't a good choice.
"This type of product isn't a safe alternative to a payday loan," Rebecca Borne, senior policy counsel at the center, said in a statement. "And we reject the notion that bank loans as high as 70 [percent] to 88 percent [annual percentage rate] will drive out higher-priced credit by nonbanks."
In May, the center and other consumer and civil rights organizations urged financial regulators to ensure bank loans do not exceed a cost of 36 percent. The 36 percent finds precedent in the Military Lending Act for loans to military service members.
But one Arkansas bank executive was pleased to see U.S. Bank offer the Simple Loan.
"I applaud U.S. Bank for recognizing a paying point for so many Americans and trying to create a solution that's less costly than payday loan alternatives," said Darrin Williams, chief executive officer of Southern Bancorp Inc., one of the few community development banks in the country. Southern Bancorp's primary mission is to develop the economy of the rural areas it serves, not just to make money for its stockholders.
Southern Bancorp "doesn't have a fancy name for it," but it offers loans at much lower rates than U.S. Bank, Williams said.
"It's what we do every day," Williams said.
Southern Bancorp, which has $1.3 billion in assets and 43 offices in Arkansas and Mississippi, has made 4,361 loans since the first of the year, Williams said. More than 10 percent of those loans -- 441 -- have been for $1,000 or less, Williams said. Mostly, these are single-digit interest rate loans, Williams said.
More than 40 percent of the bank's loans are under $10,000, usually working capital or small business loans, Williams said. All the loans are limited to interest rates of 16.9 percent or less, below the state's usury limit.
In Mississippi, where Southern Bancorp has about 15 offices, there are more payday lending stores than McDonald's, Burger King and Starbucks combined, Williams said.
On a stretch of highway in Clarksdale, Miss., where Southern Bancorp has a branch, there are almost a dozen payday lending stores within a mile of the branch, Williams said.
There's a reason there are more than a dozen payday lenders near Southern Bancorp's Clarksdale branch. There can be legitimate reasons for people needing small loans, Williams said.
"I used to be very, very critical of the payday loan industry," Williams said. "But today I'm careful not to demonize the entire industry. The [payday] products are designed for people to roll them over. I don't like that. I wish [banks] could find alternatives."
But because there is not a lot of profit in a small-dollar loan, banks have abandoned people who need those loans, Williams said.
"So while I would rather U.S. Bank have a different rate and a different program, I will say it's better than going to a storefront payday lender," Williams said.
Business on 09/19/2018